Updated project metadata. DNA methylation is a heritable chromatin modification essential to mammalian development that functions with histone post-translational modifications to regulate chromatin structure and gene expression programs. The epigenetic inheritance of DNA methylation requires the combined actions of DNMT1 and UHRF1, a histone- and DNA-binding RING E3 ubiquitin ligase that facilitates DNMT1 recruitment to sites of newly replicated DNA through the ubiquitylation of histone H3. UHRF1 binds DNA with modest selectivity towards hemi-methylated CpG dinucleotides (HeDNA); however, the contribution of HeDNA sensing to UHRF1 function remains elusive. Here, we reveal that the interaction of UHRF1 with HeDNA is required for DNA methylation inheritance but is dispensable for chromatin interaction, which is governed by reciprocal positive cooperativity between the UHRF1 histone- and DNA-binding domains. We further show that HeDNA functions as an allosteric regulator of UHRF1 ubiquitin ligase activity, directing ubiquitylation towards multiple lysines on the H3 tail adjacent to the UHRF1 histone-binding site. Collectively, our studies define a highly orchestrated epigenetic control mechanism involving modifications both to histones and DNA that facilitate UHRF1 chromatin targeting, H3 ubiquitylation, and DNA methylation inheritance.